How the South Sea Bubble Created U.K.'s Modern Monarchy

By Carolyn Harris -
Apr 5, 2013

The bubble of 1720 precipitated
England’s first stock-market crash. In August of that year,
shares in the South Sea Company reached a peak of 1,000 pounds
and dropped to 150 pounds by the end of September.

The crisis devastated thousands of investors, including Sir Isaac Newton, who reputedly said after losing 20,000 pounds, “I
can calculate the movement of heavenly bodies but not the
madness of men.” The crash also permanently changed the
structure of the constitutional monarchy, allowing a prime
minister to become head of the government as the monarch
gradually assumed the more ceremonial role of head of state.

The monarch at the time, King George I, was a controversial
successor to his second cousin, Queen Anne. He inherited the
English and Scottish thrones through the Act of Settlement of
1701, which excluded 54 closer relatives of the queen from the
succession because they were Roman Catholic. George I, the
prince of the German state of Hanover, was a Protestant.

King’s Mistress

British Protestants, however, disapproved of his personal
life. George I was unmarried, having divorced and imprisoned his
wife for adultery in 1694. When he became king in 1714, he
arrived in London with his illegitimate half-sister Sophia
Charlotte von Platen, and his mistress Melusine von der
Schulenberg. The two women were dubbed “the elephant” and “the
maypole” by satirists because of their physiques. George Frideric Handel composed his famous “Water Music” to drown out
the sound of Thames boatmen criticizing the king and his
mistress as they traveled in the royal barge.

Sophia Charlotte and Melusine were concerned about their
finances. Prices in London were about four times higher than in
Hanover and the two ladies were expected to support themselves
and their dependents in court style. The widowed Sophia
Charlotte had five children and a modest pension. She sought to
augment her income by other means, including buying lottery
tickets and accepting payments for access to the king.

Melusine was similarly strapped for cash. She had to raise
three “nieces” at her own expense. In fact, these young women
were the daughters she had with George I, who never acknowledged
paternity. She, too, offered to influence the king in exchange
for money.

Eventually, petitioners for favors included representatives
of the South Sea Company, which had been formed in 1711. The
company wished to retain its 1713 monopoly over potential
British trade with Spanish colonies in South America and inflate
the price of its stock. Sophia Charlotte and Melusine each
received 15,000 pounds of stock in the company with the promise
that 120 pounds would be paid for every point the stock price
rose above 154 pounds. Two of Melusine’s “nieces” each received
5,000 pounds of shares. The South Sea Company retained its
monopoly and the value of the shares grew until 1720.

By the time of the crash, George I himself was rumored to
have received payments from the company. He became governor of
the company in 1718 and invested his own capital in the project
as well as having inherited shares from Queen Anne. He suffered
personal financial losses.

Preferred Rate

Melusine was accompanying the king on a visit to Hanover
when the value of her shares declined in September 1720. “If we
had been present in England,” she wrote to John Aislabie, the
chancellor of the Exchequer, she and her nieces would have sold
the shares “when they were at such an advantageous Price, and I
wish you had been so kind as to do it for us, the more when you
judged and saw they was [sic] not to rise but fall as they have
done.” Aislabie judged that he couldn’t sell Melusine’s shares
at a preferred rate without discrediting the crown and his own
position.

In the inquiry that followed the South Sea Bubble, the
payments received by Sophia Charlotte and Melusine became
public. George I blocked the extradition of South Sea Company
Treasurer Robert Knight, who fled England in January 1721 after
alluding to immense bribes paid to the most prominent people at
court. John Blunt, one of the company’s founders, was arrested
and provided the list of payments. In March, Melusine and Sophia
Charlotte were accused in a House of Lords debate of accepting
bribes.

Because members of his court were implicated, George I
couldn’t claim the authority to resolve the situation alone.
Instead, Robert Walpole, the newly created first lord of the
Treasury, took charge. The assets of South Sea Company directors
were confiscated and distributed to bankrupt shareholders, and
the stock was divided between the East India Company and the
Bank of England. Walpole also fought to protect the king,
shielding Melusine and Sophia Charlotte from prosecution.

Although Walpole never formally received the title of prime
minister in his lifetime, his authority after the South Sea
Bubble was unprecedented and set the tone for the future of the
constitutional monarchy. The monarch would retain some control
over foreign affairs but the prime minister would assume the
role of head of government in the domestic realm as “the King’s
Servant.” Walpole conducted state business in the House of
Commons and united the Cabinet as an executive authority.
The monarch’s direct influence over subsequent prime ministers
varied over the course of the 18th and 19th centuries, but
Walpole’s example set the tone for the office.

(Carolyn Harris is a lecturer in history at the University
of Toronto’s School of Continuing Studies and is a royal-history
blogger at www.royalhistorian.com. The opinions expressed are
her own.)

To contact the writer of this article:
Carolyn Harris at carolyn.suzanne.harris@gmail.com